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Financial Building Corp. vs.

Rudlin International Corporation
(G.R. No. 164186, October 4, 2010)

VILLARAMA, JR., J.

FACTS:

Sometime in October 1985, Rudlin International Corporation (Rudlin) invited proposals
from several contractors to undertake the construction of a three-storey school building and other
appurtenances thereto at Vista Grande, BF Resort Village, Las Piñas, Metro Manila. The
contract was eventually awarded to Financial Building Corporation (FBC), with a bid
of P6,933,268.00 as total project cost. On November 22, 1985, Rudlin represented by its
Chairman of the Board and President Rodolfo J. Lagera, and FBC represented by its Vice-
President and Treasurer Jaime B. Lo, executed a Construction Agreement which, among others,
provided for the total consideration and liability for delay.

The contract also provided for completion date not later than April 30, 1986 unless an
extension of time has been “authorized and approved by the OWNER and the ARCHITECT in
writing.”
[6]
It appears that the construction was not finished on said date as Rudlin wrote FBC to
complete the project not later than May 31, 1986, except for the administration wing which
Rudlin expected to be turned over to it “100% complete by June 10, 1986.”

On June 5, 1986, Rudlin and FBC made amendments to their Construction Agreement
dated November 22, 1985 through a Letter-Agreement signed by Rodolfo J. Lagera and Jaime B.
Lo.
On June 15, 1986, the subject school building, “Bloomfield Academy,” was inaugurated
and utilized by Rudlin upon the start of the school year. From the exchange of correspondence
between FBC and Rudlin, it can be gleaned that no reconciliation of accounts took place
pursuant to the Letter-Agreement dated June 5, 1986. FBC demanded payment of the balance of
the adjusted contract price per its computation, but it was not heeded by Rudlin.

On March 10, 1987, FBC filed in the RTC a suit for a sum of money with prayer for
preliminary attachment against Rudlin, Bloomfield Educational Foundation, Inc. (Bloomfield)
and their officers, directors or stockholders, namely: Rodolfo J. Lagera, Ma. Erlinda J. Lagera
and Josaphat R. Bravante. FBC alleged that the total and final contract price, inclusive of
additives and deductives which are covered by valid documents, is P7,324,128.44; that Rudlin
paid FBC only P4,874,920.14, thus leaving a balance ofP2,449,208.30; and that despite repeated
demands by FBC, Rudlin refused to pay its obligations. FBC further prayed for legal interest
on the amount of P2,449,208.30 from the time it became due and demandable, attorney’s fees
equivalent to 25% of the total amount due, moral and exemplary damages and the cost of suit.

The trial court granted the prayer for preliminary attachment but before the sheriff could
implement the writ issued by the court, Rudlin filed the proper counter bond.

In their Answer with Counterclaim, defendants denied the allegations of the complaint.
Rudlin averred that the Construction Agreement did not reflect the true contract price agreed
upon, which is P6,006,965.00. The amount of P6,933,268.00, which is FBC’s bid price, was
indicated in the Construction Agreement solely for the purpose of obtaining a higher amount of
loan from the Bank of Philippine Islands (BPI). The execution of said document was made
with the understanding between FBC and Rudlin that the contract price stated therein would be
decreased to a mutually acceptable contract price. However, due to inadvertence, the parties
forgot to sign an agreement fixing the true contract price.

Rudlin also denied that the construction of the project was completed by FBC. The
original completion date, April 30, 1986, was later moved to June 10, 1986. But despite the
extension given by Rudlin, FBC still has not completed the project. Neither did FBC deliver to
Rudlin a complete release of all liens arising out of the Construction Agreement or receipts in
full in lieu thereof, as well as an affidavit that the releases and receipts include all the labor,
interests and equipment for which a claim or action can be filed, as required under Section Eight
of the Construction Agreement. In fact, for non-payment by FBC of one of its sub-contractors,
Rudlin was sued as a co-defendant with FBC in Civil Case No. 15734 pending before the RTC of
Makati, Branch 138.

Rudlin likewise claimed that many portions of the work performed by FBC are incomplete
and/or faulty, defective and deficient (valued at P1,180,127.35), for which reason Architect
Eduardo R. Quezon has not certified on the full performance and completion of the project. The
work done by FBC was thus not accepted by Rudlin for valid reasons. Rudlin had already paid
FBC the total amount of P5,564,219.58. After considering the 10% retention money and the
value of additives and deductives, Rudlin had actually overpaid FBC by P415,701.34. Clearly,
Rudlin does not owe FBC the amount stated in its Complaint; FBC likewise had sent a final
demand letter dated March 2, 1987 to Rudlin which mentioned only the amount of P115,000.00
as Rudlin’s outstanding accountability.

As to Bloomfield and the individual defendants, they contended that not being parties to
the Construction Agreement, FBC has no cause of action against them. Moreover, in their
dealings with FBC, they acted with justice, honesty and good faith.

Under its counterclaim, Rudlin invoked the provision in the Construction Agreement
granting the Owner the right to terminate the contract and take over the construction works upon
default of the Contractor who abandons or fails to complete the project, or fails to carry out the
work in accordance with the provisions of the Contract Documents, and to deduct the costs from
whatever payment is due or to become due to the Contractor. Rudlin asserted that despite
demands it made upon FBC, the latter still failed and refused to complete and make good its
obligations under the Construction Agreement and to correct faulty and defective works.

In its Reply, FBC asserted that the demand letter dated March 2, 1987 pertains to another
account of Rudlin. FBC asserted that its failure to deliver releases of some liens was due to
Rudlin’s failure to pay the amount claimed in the complaint. At any rate, by the very fact that
Rudlin is actually making use of the school building constructed by FBC, it is deemed to have
accepted the work.
By agreement of the parties, the trial court appointed three Commissioners to resolve
factual issues pertaining to the construction of the subject building.

On September 28, 1989, they submitted a detailed report on their findings and
conclusions, including the additives (modifications and additional works, the value of which are
to be reimbursed by the Owner) and deductives (deficiencies and cost of repairs done by the
Owner and other expenses which shall be deducted from the contract price due to the
Contractor). FBC submitted its comments on the said report denying any responsibility for the
alleged defects and deficiencies found by the commissioners and insisting that it had fully
performed all the works in accordance with the plans, specifications and modifications as
approved by Rudlin.

The trial court concluded that as shown by the Commissioners’ Report, the subject school
building had several defects. It found untenable FBC’s denial of any responsibility for the
defects caused by the inferior quality of waterproofing material used by its subcontractor,
INDESCO, citing Section Eleven of the Construction Agreement whereby the Contractor
assumes full responsibility for the acts, negligence or omissions of all its employees, as well as
for those of its subcontractor and the latter’s employees. Moreover, the modifications to the
original plans and specifications, which gave rise to the deductives and additives, were not
shown to have been approved by Rudlin nor concurred in by the project Architect, contrary to
FBC’s allegation.

While the CA upheld the dismissal of the complaint as against the individual defendants
and Bloomfield, it found that FBC was able to substantiate its claim against Rudlin for the
unpaid balance of the contract price of P6,933,268.00 (not P6,006,965.00), which after
considering the additives and deductives, the direct payment made by Rudlin, cost of chargeable
materials and rebates, would still leave the amount of P1,508,464.84 due to FBC based on the
Summary of Contract Revisions and Unpaid Balances on which Gregorio P. Pineda testified.

According to the CA, if not for the alleged construction defects and supposed additives
and deductives, Rudlin could have considered the building “complete”, as in fact the school
building is already being used as such by Rudlin. In resolving the issues pertinent to said
construction defects, the CA declared that it cannot rely solely on the Commissioners’ Report
considering that the commissioners who tried to explain their “conclusions” contained in the said
report testified that these were made “not exactly what they actually intended to report.”

Analyzing the evidence on record, the CA concluded that FBC was not liable for the defect
in waterproofing and delay in the completion of the works for certain reasons. The CA thus
ordered Rudlin to pay FBC the remaining balance of P1,508,464.84.

Rudlin filed a motion for reconsideration while FBC moved for partial reconsideration of
the CA decision. The CA denied both motions under its Resolution dated June 23, 2004. Hence,
appealed the case to the SC.



ISSUE/S:
(1) whether FBC is liable for the defects in the construction of the subject school building and
delay in the completion of the works;
(2) after considering the payments, deductives and additives and other charges admitted, whether
Rudlin is still liable for the balance of the contract price and the amount thereof; and
(3) whether Rudlin is entitled to its counterclaim.

HELD:
I

The Court thus cannot agree with the CA’s stance that in view of the disagreement
expressed by the commissioners in their testimonies, it would be unjust to hold FBC responsible
for the substandard waterproofing. The conclusions set forth in the Commissioners’ Report are
categorical in declaring the omissions, deviations and negligence of the Contractor (FBC) in the
execution of the construction project.

Likewise, the letter dated July 7, 1986 of FBC’s project engineer Alexander E. Reyes
informing Architect Quezon that the change in waterproofing brand was approved by Bravante is
at best, self-serving, and the same does not bind Rudlin. Under Section Nine of the Construction
Agreement, Architect Quezon, as representative of the Owner, is the one vested with the general
supervision and direction of the work and who is authorized to “reject work which does not
conform to the Contract Documents” and to formally stop such work or a portion thereof when
necessary. More explicitly, Section Ten of the same agreement provides that the Owner shall
give all instructions to the Contractor through the Architect.

FBC therefore cannot escape liability for the poor quality of waterproofing on the ground
that Rudlin’s representative was present during the meeting when the change in brand to be used
was allegedly discussed with his concurrence. At this point, it bears to stress that the June 5,
1986 Letter-Agreement signed by both FBC and Rudlin, which extended the completion time to
June 10, 1986 expressly amended only the corresponding provisions of the Construction
Agreement pertaining to completion date and schedule of payment of the balance due to FBC,
which was conditioned on the reconciliation of the upgrading and downgrading of the work done
by the contractor. Said Letter-Agreement did not relieve FBC as contractor of responsibility for
defects under its warranties under the Construction Agreement, which include those works
performed by its subcontractor.

The Court finds that in withholding payment of the balance of the contract price, Rudlin
properly exercised its rights under the Construction Agreement. Considering that FBC had not
completed the corrective/repair works in accordance with the Contract Documents and as
approved or certified in writing by the Architect as to its completion, its demand for the payment
of the final balance was premature. Under the Letter-Agreement dated June 5, 1986, final
payment was subject to reconciliation of their accounts regarding the upgrading and
downgrading done on the project. In reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a proper manner with what is incumbent upon
him. When the substandard waterproofing caused extensive damage to the school building, it was
incumbent upon FBC to institute at its own expense the proper repairs in accordance with the
guaranty-warranty stated in the Construction Agreement. Thus, Rudlin cannot be said to have
incurred delay in the reconciliation of accounts, as a precondition for final payment; instead, it is
FBC who was guilty of delay by its stubborn refusal to replace or re-execute the defective
waterproofing of the subject school building.

II
On the issue of the correct total contract price, the Court hold that Rudlin failed to
substantiate its claim that the contract price stated in the Construction Agreement
(P6,933,268.00) was not the true contract price because it had an understanding with FBC’s
Jaime B. Lo that they would decrease said amount to a mutually acceptable amount.

Under the general rule in Section 9 of Rule 130 of the Rules of Court, when the terms of an
agreement were reduced in writing, as in this case, it is deemed to contain all the terms agreed
upon and no evidence of such terms can be admitted other than the contents thereof. Rudlin
failed to avail of its right to seek the reformation of the instrument to the end that such true
intention may be expressed.
Evidence of a prior or contemporaneous verbal agreement is generally not admissible to
vary, contradict or defeat the operation of a valid contract. But apart from the Bar Chart and
Cash Flow Chart prepared by FBC, and the testimony of Rodolfo J. Lagera, no competent
evidence was adduced by Rudlin to prove that the amount of P6,006,965.00 stated therein as
contract price was the actual decreased amount that FBC and Rudlin found mutually acceptable.

III
As to Rudlin’s counterclaim for reimbursement of its expenses in repairing the defective
waterproofing, not a single receipt was presented by Rudlin to prove that such expense was
actually incurred by it. Under the Civil Code, one is entitled to an adequate compensation only
for such pecuniary loss suffered by him as he has duly proved. The award of actual damages
must be based on the evidence presented, not on the personal knowledge of the court; and
certainly not on flimsy, remote, speculative and nonsubstantial proof.

The counterclaim for attorney’s fees must likewise be denied. Attorney’s fees as part of
damages is awarded only in the instances specified in Article 2208 of the Civil Code.